Tech sector spurs Mass. growth as US economy contracts

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No one is calling it a return to boom times, but the state’s economy grew modestly in the ­final three months of 2012, even as the US economy unexpectedly contracted slightly, the University of Massachusetts reported Wednesday.

The contrast offered further evidence the state is rebounding from the recession at a more robust pace than the nation as a whole, largely on the strength of its technology industries.

“This appears to be a slow quarter, but the Massachusetts economy is growing still,” said Alan Clayton-Matthews, a Northeastern University economist and author of the report. “And growth is going to pick up.”

The state’s economy grew at a 1 percent annual rate in the fourth quarter, while the Commerce Department said the US economy shrunk
at an annual rate of one-tenth of a percent, largely because of a pullback in government spending.

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Over all of 2012, the Massachusetts economy grew 2.1 percent, compared with 1.5 percent nationally, according to UMass. The state also put people back to work at a faster rate — employment grew by 1.6 percent last year, compared with 1.4 percent nationally. Those figures could change, however, as revisions to the data are made in coming weeks by statistical agencies.

The state growth rates were reported in MassBenchmarks, an economic journal published by UMass and the Federal Reserve Bank of Boston. The decline in US economic growth was the first contraction since the first half of 2009, according to the Commerce Department.

The report put a damper on the recent rally in US stocks, which retreated from five-year highs. The Dow Jones industrial average fell 44 points, or 0.32 percent, to 13,910.42, while the broader Standard & Poor’s 500 index fell 5.88 points, or 0.39 percent, to 1,501.96. The technology heavy Nasdaq lost
11.35 points, or 0.36 percent, to close at 3,142.31.

Economists said the contraction was not the harbinger of another US recession. But Federal Reserve policy makers, meeting in Washington on Wednesday, acknowledged in a statement that the economy had slowed in recent months as a result of Hurricane Sandy and other temporary factors. The Fed said it would maintain its policies to stimulate the economy and keep long- and short-term interest rates low.

Still, the decline surprised many analysts, who had forecast that the national economy grew at the end of last year, albeit weakly. Uncertainty about whether Congress would avoid a scheduled combination of tax increases and deep spending cuts — and potential recession — may have contributed to the contraction, economists said.

Overall government spending in the fourth quarter fell at an annual rate of nearly 7 percent; defense spending plunged at a rate of more than 20 percent as the Pentagon braced for possible budget cuts, analysts said. Businesses may also have cut inventories because of the political and economic uncertainty, analysts said, another factor in the contraction.

Michael Goodman, a professor of public policy at UMass Dartmouth, said the surprise contraction underscores the impact that political gamesmanship and gridlock in Washington can have on the economy.

“The economic data that’s been coming out as of late reinforces the idea that policy choices matter,” he said. “Our inability to come to an agreement at the national level about how much money we’re going to spend, and when, has consequences. We can’t pin the whole thing on that, but those choices matter.”

Economists noted that activity in the private sector expanded. Consumer spending accelerated to a 2.2 percent annual rate in the fourth quarter, from 1.6 percent in the third quarter. Spending on housing jumped at an annual rate of more than 15 percent.

Business investment rebounded, too. Spending by businesses on software and equipment, for instance, surged at annual rate of more than 12 percent in the fourth quarter after falling at a rate of nearly 3 percent in the third quarter.

“That’s a pretty good story in the private sector,” said Brian Bethune, an economics professor at Gordon College in Wenham

Business investment is particularly important to Massachusetts, which has a high concentration of companies that sell goods and services, particularly technology products, to other companies. Even as consumers rebounded slowly from the last recession, business spending has come back solidly, fueling the state’s recovery.

The UMass report projects that the state’s recovery will pick up speed over the next several months, expanding at a 3.6 percent annual rate.

But Clayton-Matthews warned that there are still reasons to be cautious about the outlook. For example, he said, wage and salary income ­declined somewhat in the last three months of the year, while consumer spending grew slowly.

Megan Woolhouse of the Globe staff contributed to this report. Robert Gavin can be reached at rgavin@globe.com.

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